A side business like renting out a room or home through Airbnb or driving for a ride-hailing service like Uber can bring in some much needed extra income. However, when tax season comes around, it is essential to report this additional income.
You will have to incur many expenses to earn that extra income, and they can be used for reducing your taxes. In short, some costs which were paid to earn that income can reduce taxes.
For example, if you rented out a room on Airbnb, then the water cost, heat, electricity, and other repair-related costs are related to the business. The profit after expenses is the rental income and must be reported on a tax return.
Similarly, for an Uber driver, it is essential to maintain logs regarding car usage for paid trips and separate records for the private use of the car. The profit reported in this case would be passengers’ income after deducting fuel and any other expenses.
Like in any other business, in your side business too, record-keeping is essential.
Earlier this year, Airbnb e-mailed 11,000 people in Ontario who leased their homes or other spaces for rent on its site, requesting them to report the income as part of a pilot project with Airbnb has been reported.
There has in the past, however, been a probe into big eBay sellers, and the CRA will find out eventually if you are doing business with new business models.
Not declaring side business revenues could lead to penalties and even prosecution if the amount is significant.
Ask yourself if the income earned outside your main job last year would be viewed as a legitimate business income. Also, it is crucial to note that not all expenses and purchases are treated the same. Ask your tax person to help you determine the capital expenditure and capital cost allowance to calculate effectively. Some costs which are more ‘current’ in nature, cannot be deducted in full or may have special rules.